Financial Services (Banking Reform) Bill (HC Bill 2)

Make further provision about banking and other financial services, including provision about the Financial Services Compensation Scheme; to make provision for the amounts owed in respect of certain deposits to be treated as a preferential debt on insolvency; to make provision about the accounts of the Bank of England and its wholly owned subsidiaries; and for connected purposes.

Be it enacted by the Queen’s most Excellent Majesty, by and with the advice and consent of the Lords Spiritual and Temporal, and Commons, in this present Parliament assembled, and by the authority of the same, as follows:—

Ring-fencing

1Objectives of Prudential Regulation Authority

(1)Section 2B of FSMA 2000 (the PRA’s general objective) is amended as follows.

(2)In subsection (3)—

(a)5at the end of paragraph (a), omit “and”, and

(b)after paragraph (b) insert “, and

(c)discharging its general functions in relation to the matters mentioned in subsection (4A) in a way that seeks to—

(i)10ensure that the business of ring-fenced bodies is carried on in a way that avoids any adverse effect on the continuity of the provision in the United Kingdom of core services,

(ii)ensure that the business of ring-fenced bodies is 15protected from risks (arising in the United Kingdom or elsewhere) that could adversely affect the continuity of the provision in the United Kingdom of core services, and

(iii)minimise the risk that the failure of a ring-fenced 20body could affect the continuity of the provision in the United Kingdom of core services.”

(c)any body corporate incorporated in the United Kingdom that has a ring-fenced body as a member of its group;

(d)applications under Part 4A which, if granted, would result, or would be capable of resulting, in a person becoming a ring-10fenced body.”

2 Modification of objectives of Financial Conduct Authority

After section 1I of FSMA 2000 insert—

“Modifications applying if core activity not regulated by PRA

1IAModifications applying if core activity not regulated by PRA

(1)15If and so long as any regulated activity is a core activity (see section 142B) without also being a PRA-regulated activity (see section 22A), the provisions of this Chapter are to have effect subject to the following modifications.

(2)Section 1B is to have effect as if—

(a)20in subsection (3) after paragraph (c) there were inserted—

“(d)in relation to the matters mentioned in section 1EA(2), the continuity objective (see section 1EA).”, and

(b)in subsection (4), for “or the integrity objective,” there were substituted “, the integrity objective or (in relation to the matters 25mentioned in section 1EA(2)) the continuity objective,”.

(3)After section 1E there is to be taken to be inserted—

“1EAContinuity objective

(1)(1) In relation to the matters mentioned in subsection (2), the continuity objective is: protecting the continuity of the 30provision in the United Kingdom of core services (see section 142C).

(2) Those matters are—

(a)Part 9B (ring-fencing);

(b)ring-fenced bodies (see section 142A);

(c)35any body corporate incorporated in the United Kingdom that has a ring-fenced body as a member of its group;

(d)applications under Part 4A which, if granted, would result, or would be capable of resulting, in a person becoming a ring-fenced body.

40(3) The FCA’s continuity objective is to be advanced primarily by—

(a)seeking to ensure that the business of ring-fenced bodies is carried on in a way that avoids any adverse effect on the

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continuity of the provision in the United Kingdom of core services,

(b)seeking to ensure that the business of ring-fenced bodies is protected from risks (arising in the United Kingdom or 5elsewhere) that could adversely affect the continuity of the provision in the United Kingdom of core services, and

(c)seeking to minimise the risk that the failure of a ring-fenced body could adversely affect the continuity of the provision in the United Kingdom of core services.”.”

310Amendment of PRA power of direction

In section 3I of FSMA 2000 (power of PRA to require FCA to refrain from specified action), in subsection (4)—

(a)at the end of paragraph (a), omit “or”, and

(b)at the end of paragraph (b) insert “, or

(c)15threaten the continuity of core services provided in the United Kingdom.”

4Ring-fencing of certain activities

(1)After Part 9A of FSMA 2000 insert—

“Part 9B

Ring-fencing

Introductory

142A20“Ring-fenced body”

(1)In this Act “ring-fenced body” means a UK institution which carries on one or more core activities (see section 142B) in relation to which it has a Part 4A permission.

(2)But “ring-fenced body” does not include—

(a)25a building society within the meaning of the Building Societies Act 1986, or

(b)a UK institution of a class exempted by order made by the Treasury.

(3)An order under subsection (2)(b) may be made in relation to a class of 30UK institution only if the Treasury are of the opinion that the exemption conferred by the order would not be likely to have a significant adverse effect on the continuity of the provision in the United Kingdom of core services.

(4)An order under subsection (2)(b) may provide for the exemption to be 35subject to conditions.

(5)In this section “UK institution” means a body corporate incorporated in the United Kingdom.

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142BCore activities

(1)References in this Act to a “core activity” are to be read in accordance with this section.

(2)The regulated activity of accepting deposits (whether carried on in the 5United Kingdom or elsewhere) is a core activity unless it is carried on in circumstances specified by the Treasury by order.

(3)An order under subsection (2) may be made only if the Treasury are of the opinion that it is not necessary for either of the following purposes that the regulated activity of accepting deposits should be a core 10activity when carried on in the specified circumstances.

(4)Those purposes are—

(a)to secure an appropriate degree of protection for the depositors concerned, or

(b)to protect the continuity of the provision in the United Kingdom 15of services provided in the course of carrying on the regulated activity of accepting deposits.

(5)The Treasury may by order provide for a regulated activity other than that of accepting deposits to be a core activity, either generally or when carried on in circumstances specified in the order.

(6)20An order under subsection (5) may be made only if the Treasury are of the opinion—

(a)that an interruption of the provision of services provided in the United Kingdom in the carrying on of the regulated activity concerned could adversely affect the stability of the UK25financial system or of a significant part of that system, and

(b)that the continuity of the provision of those services can more effectively be protected by treating the activity as a core activity.

142CCore services

(1)References in this Act to “core services” are to be read in accordance 30with this section.

(2)The following are core services—

(a)facilities for the accepting of deposits or other payments into an account which is provided in the course of carrying on the core activity of accepting deposits;

(b)35facilities for withdrawing money or making payments from such an account;

(c)overdraft facilities in connection with such an account.

(3)The Treasury may by order provide that any other specified services provided in the course of carrying on the core activity of accepting 40deposits are also core services.

(4)If an order under section 142B(5) provides for an activity other than that of accepting deposits to be a core activity, the Treasury must by order provide that specified services provided in the course of carrying on that activity are core services.

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(5)The services specified by order under subsection (4) must be services in relation to which the Treasury are of the opinion mentioned in section 142B(6)(a).

142DExcluded activities

(1)5References in this Act to an “excluded activity” are to be read in accordance with this section.

(2)The regulated activity of dealing in investments as principal (whether carried on in the United Kingdom or elsewhere) is an excluded activity unless it is carried on in circumstances specified by the Treasury by 10order.

(3)An order under subsection (2) may be made only if the Treasury are of the opinion that allowing ring-fenced bodies to deal in investments as principal in the specified circumstances would not be likely to result in any significant adverse effect on the continuity of the provision in the 15United Kingdom of core services.

(4)The Treasury may by order provide for an activity other than the regulated activity of dealing in investments as principal to be an excluded activity, either generally or when carried on in circumstances specified in the order.

(6)In deciding whether to make an order under subsection (4) in relation 25to any activity, the Treasury must—

(a)have regard to the risks to which a ring-fenced body would be exposed if it carried on the activity concerned, and

(b)consider whether the carrying on of that activity by a ring-fenced body would make it more likely that the failure of the 30body would have an adverse effect on the continuity of the provision in the United Kingdom of core services.

(7)An order under subsection (4) may be made only if the Treasury are of the opinion that the making of the order is necessary or expedient for the purpose of protecting the continuity of the provision in the United 35Kingdom of core services.

142EPower of Treasury to impose prohibitions

(1)The Treasury may by order prohibit ring-fenced bodies from—

(a)entering into transactions of a specified kind or with persons falling within a specified class;

(b)40establishing or maintaining a branch in a specified country or territory;

(c)holding in specified circumstances shares or voting power in companies of a specified description.

(2)In deciding whether to make an order under this section imposing a 45prohibition, the Treasury must—

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(a)have regard to the risks to which a ring-fenced body would be exposed if it did the thing to which the prohibition relates, and

(b)consider whether the doing of that thing by a ring-fenced body would make it more likely that the failure of the body would 5have an adverse effect on the continuity of the provision in the United Kingdom of core services.

(3)An order under this section may be made only if the Treasury are of the opinion that the making of the order is necessary or expedient for the purpose of protecting the continuity of the provision in the United 10Kingdom of core services.

(4)An order under this section may in particular—

(a)provide for any prohibition to be subject to exemptions specified in the order;

(b)provide for any exemption to be subject to conditions specified 15in the order.

is to be taken to have contravened a requirement imposed on the body by the appropriate regulator under this Act.

(2)45The contravention does not—

(a)make a person guilty of an offence;

(b)make a transaction void or unenforceable;

(c)(subject to subsection (3)) give rise to any right of action for breach of statutory duty.

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(3)In such cases as the Treasury may specify by order, the contravention is actionable at the suit of a person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty.

(4)5In this section “the appropriate regulator” means—

(a)in relation to a ring-fenced body which is a PRA-authorised person, the PRA;

(b)in relation to any other ring-fenced body, the FCA.

Ring-fencing rules

142H10Ring-fencing rules

(1)In the exercise of its power to make general rules, the appropriate regulator must in particular make rules—

(a)requiring a ring-fenced body to make arrangements to ensure the effective provision to the ring-fenced body of services and 15facilities that it requires in relation to the carrying on of a core activity, and

(b)making provision for the group ring-fencing purposes applying to ring-fenced bodies and to authorised persons who are members of a ring-fenced body’s group.

(2)20Section 142E(1)(c) does not affect the power of the appropriate regulator to make general rules imposing restrictions on the extent of the shares or voting power that a ring-fenced body may hold in another company, except where a restriction on the extent of the shares or voting power that the ring-fenced body may hold in the company is 25imposed by order under section 142E(1)(c).

(3)General rules that are required by this section or make provision falling within subsection (2) are in this Act referred to as “ring-fencing rules”.

(4)The “group ring-fencing purposes” are—

(a)ensuring as far as reasonably practicable that the carrying on of 30core activities by a ring-fenced body is not adversely affected by the acts or omissions of other members of its group;

(b)ensuring as far as reasonably practicable that in carrying on its business a ring-fenced body—

(i)is able to take decisions independently of other 35members of its group, and

(ii)does not depend on resources which are provided by a member of its group and which would cease to be available to the ring-fenced body in the event of the insolvency of the other member;

(c)40ensuring as far as reasonably practicable that the ring-fenced body would be able to continue to carry on core activities in the event of the insolvency of one or more other members of its group.

(5)Ring-fencing rules made for the group ring-fencing purposes must 45include—

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(a)provision restricting the power of a ring-fenced body to enter into contracts with other members of its group otherwise than on arm’s length terms;

(b)provision restricting the payments that a ring-fenced body may 5make (by way of dividend or otherwise) to other members of its group;

(c)provision requiring the disclosure to the appropriate regulator of information relating to transactions between a ring-fenced body and other members of its group;

(d)10provision requiring a ring-fenced body to ensure that its board of directors (or if there is no such board, the equivalent management body) includes to a specified extent—

(i)members who are treated by the rules as being independent of other members of the ring-fenced 15body’s group,

(ii)members who are treated by the rules as being independent of the ring-fenced body itself, and

(g)provision requiring arrangements made by the ring-fenced body for the identification, monitoring and management of risk 25to meet specified requirements;

(h)such other provision as the appropriate regulator considers necessary or expedient for any of the purposes in subsection (4).

(6)The reference in subsection (5)(e) to a remuneration policy is a reference to a policy about the remuneration of officers, employees and other 30persons who (in each case) are of a specified description.

(7)The reference in subsection (5)(f) to a human resources policy is a reference to a policy about the appointment and management of officers, employees and other persons who (in each case) are of a specified description.

(8)35In this section—

“the appropriate regulator” means—

(a)

in relation to a ring-fenced body which is a PRA-authorised person, the PRA;

(b)

in relation to any other ring-fenced body, the FCA;

40 “shares” has the meaning given in section 422;

“specified” means specified in the rules;

“voting power” has the meaning given in section 422.

142IPowers of Treasury in relation to ring-fencing rules

(1)The Treasury may by order require the appropriate regulator, as 45defined in section 142H(8), to include (or not to include) in ring-fencing rules specified provision relating to—

(2)The power to make an order under this section is exercisable only if the Treasury consider it necessary or expedient to do so—

(a)for any of the group ring-fencing purposes as defined in section 142H(4), or

(b)5otherwise for securing the independence of ring-fenced bodies from other members of their groups.

(3)“Specified” means specified in the order.

142JReview of ring-fencing rules

(1)The PRA must carry out reviews of its ring-fencing rules.

(2)10The first review must be completed before the end of the period of 5 years beginning with the day on which the first ring-fencing rules come into force.

(3)Subsequent reviews must be completed before the end of the period of 5 years beginning with the day on which the previous review was 15completed.

(4)The PRA must give the Treasury a report of each review.

(5)The Treasury must lay a copy of the report before Parliament.

(6)The PRA must publish the report in such manner as it thinks fit.

(7)If (because any ring-fenced body is not a PRA-authorised person) 20section 142H has the effect of requiring the FCA to make ring-fencing rules, subsections (1) to (6) apply to the FCA as they apply to the PRA.

Pension liabilities

142KPension liabilities

(1)For the purposes of this section an occupational pension scheme is a 25“relevant pension scheme” if—

(a)it is a multi-employer scheme, as defined in section 75A(13) of the Pensions Act 1995 or Article 75A(13) of the Pensions (Northern Ireland) Order 1995,

(b)it is not a money purchase scheme,

(c)30at least one of the employers in relation to the scheme is a ring-fenced body, and

(d)at least one of the employers in relation to the scheme is not a ring-fenced body.

(2)The Treasury may by regulations—

(a)35require a ring-fenced body which is an employer in relation to a relevant pension scheme to make arrangements for the purpose of—

(i)ensuring that the ring-fenced body cannot become liable to meet, or contribute to the meeting of, liabilities in 40respect of pensions or other benefits payable to or in respect of employment by a person who is not a ring-fenced body, and